the casey research 2011 silver investing guide
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By Jeff Clark, editor ofBIG GOLD
T Casey Research
2011 Casey Research
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Welcome to Casey Research!
Silver has been on fire over the last three years substantially
outperforming its spotlight-grabbing cousin, gold.
Because we believe this bull run is far from over, we advise investors to
always maintain exposure to the precious metals markets. Even if you
havent yet participated in the run-up of both gold and silver, Im glad youre
ready to take a look at the investment potential of silver.
The question every investor faces in a bull market is: Do I buy now,anticipating prices will continue higher and chance getting clobbered if a
correction arrives? Or do I wait for a pullback and possibly miss out on big
gains? Theres risk either way.
Our goal in this report is to suggest various ways you can invest in silver,
while underscoring the importance of patience and discipline. Investors
must remain patient to avoid chasing silver, overpaying, and draining their
cash. Instead, we recommend that you use temporary price declines tosteadily accumulate the best silver stocks and your preferred form of bullion.
Looking back after this bull market has finally run its course, we think
gold and silver will have amply rewarded those who bought smart, had
meaningful exposure, and stayed the course.
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Silver: The Lay of the Land
There is ample data on the silver market to consider, but there are two
specific issues regarding supply and demand that are critical to understand.
The first is industrial use. Demand from a number of industries that use
silver has been flat or falling. Household demand for silver like cutlery,
flatware, and candlesticks hasnt risen in ten years. Jewelry fabrication is up
but a blip. With the shift to digital photography and image storing, use in
photographic film processing continues to fall. And yet, total demand from
industrial users keeps climbing.
So whats driving industrial demand?
Since 1999, consumption in electronics has increased 120%. Silver use in
solar panels began in 2000, and usage is up 640% since. Silver was first used
in biocides (antibacterial agents) in 2002 and, while a small percentage of
total silver use, it has grown six-fold.
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Uses for Silver Are Growing
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The point is that not only are the number of uses for silver growing, the
demand within each of those applications is rising as well. This is important
to keep in mind because, traditionally, the industrial component of
silver tends to keep the price soft in a poor economy and Doug Casey is
convinced were on the cusp of the Greater Depression.
However, these increasing sources of demand are now more likely to keep
a floor under the price in the future. In fact, the Silver Institute forecasts
that total industrial use of silver will rise by 36% over the next five years,
to 666 million troy ounces/year. Thats a lot of silver, meaning this portion
of demand, which is roughly 60% of all fabrication, isnt letting up anytime
soon.
The second issue is mine supply. Silver mine production has been increasing
over the past decade, largely due to rising prices, allowing companies to
ramp up production and bring more metal to the market. In fact, global
mine production is up 33% since 1999. Meanwhile, total demand, as youll
see in the chart below, is also rising.
So whats the concern?
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Mine Production Cant Keep Up with Demand
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In spite of miners digging up more and more silver, production alone cant
meet global demand, and the gap has to be filled by scrap silver coming to
market.
And theres a catch with scrap. While scrap metal comprises about 20% of
silvers total supply, many of these new applications are difficult to reclaim.
Some applications contain such small amounts that theyre uneconomic to
recapture, such as many biocidal and nanotechnology applications. With
others itll be a long wait. Solar panels, for example, have a 20- to 30-year
life. Still others are waiting on more effective recovery programs; more than
half of all silver in cell phones, TVs, computers and other electronics, for
instance, still ends up in landfills.
In other words, a growing portion of the silver thats consumed wont be
returning to the market anytime soon.
And this is occurring at a time when new uses for silver are being found
almost every day, particularly in the biocide arena. In fact, its difficult to
catalog all the growing uses of the metal.
To be clear, scrap will increase with higher prices. In fact, some refineries
are expanding their operations to keep up with the increased supply of the
metal. It becomes more economical to recover the small amount of silver
from printed circuit boards, for example, when the price is twice what it was
last year. And manufacturers have an increased incentive to recycle when
they can fetch a bigger return on their efforts.
But the bottom line is this: recycling of scrap silver must continue to grow
just to keep pace with the increased demand. And with scrap being an
unpredictable portion of total supply, we cannot rely on it to always fill anysupply gaps.
Last, much of the sudden rise in silver is due to its growing role as a
monetary metal as a result of investor fears about the global economy.
This isnt surprising when you look at the debasement of the worlds major
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currencies, rising inflation, and the ongoing sovereign debt crises in the EU.
Silver is especially gaining monetary status in emerging economies, where
demand is growing three times faster than the established industrialized
countries. And this trend is not an anomaly; silver has been used as money
for over 3,000 years, and the word for money in many languages is
silver.
The big picture is clear. Not only are supply and demand forces bullish
for silver, but more and more investors are turning to silver for protection
against inflation and eroding currencies. Throw in the fact that most
governments have no silver reserves and our conclusion is that silver will
remain in a bull market well into the future.
Is Now a Good Time to Buy?
This all sounds good, Jeff,I can imagine readers saying, But the price has
doubled since last summer... should I really buy at this level?
First, one of our key mantras is this: dont chase something thats running
higher, and dont plunk down a wad of money after such a surge.
Next, you absolutely must buy with the big picture in mind. If the long-term
outlook indicates theres a lot more upside, its easier to buy knowing the
fundamentals are working in your favor. Youll see a sell-off for what it is a
temporary drop in price within the context of a bigger trend.
Ive covered the big picture regarding silver supply and demand. Now lets
put theprice of silver into context.
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Adjusted for inflation, silver reached $111.75 at
its 1980 peak. And this assumes you accept the
governments understated measure of inflation
(we dont). In spite of the recent run- up, were
nowhere near that level. Throw in how much
more serious todays currency issues are and
one can argue that silver could reach far higher
prices.
Finally, its no secret theres a surge in
investment demand for silver. Mints around the
world keep running out of product... demandin many countries is through the roof... Eagles
and Maple Leafs are out of stock its dizzying
to keep up with it all. With so many investors
buying metal, are we approaching a peak?
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Silver in 1971 Dollars
Although the Hunt Brothers
accumulation of silver
contributed to the metalsascent in the late 1970s,
was this the major reason
for silvers climb? Thats
important to ask because
maybethat big spike wont
be repeated without a
similar catalyst. While no
one cananswer that question
conclusively, Im skeptical. You
can read my take here.
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This chart shows the net buying and selling of investors. Youll notice that
while buying has jumped tremendously in recent years, its still 36% below
the 1980 high. This data includes the ETF products introduced over thepast few years. And keep in mind that the global population is roughly 57%
greater!
Silver is nowhere near its inflation-adjusted high, and investment demand,
while strong, is far below its prior peak. These two factors paint a clear
picture about silvers price potential: there is still a long way up.
Theres no way to know if the price will continue soaring, suddenly sell off,
or trade sideways. Knowing this, theres only one strategy that keeps you in
the market, lets you buy when lower prices occur, and works to build your
position without worrying about price volatility: accumulate in tranches,
otherwise known as dollar cost averaging.
Buy one tranche now, buy another tranche next month, etc., until you have a
position sufficient in size to benefit from the bull market.
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Silver Investment Still Bellow 1980 Peak
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SilverBullion Squeeze:Is This Just the Beginning?
To get a handle on the silver bullion market, I turned to Andy Schectman ofbullion dealer Miles Franklin, an insider with deep contacts in the industry.
Youre welcome to take Andys comments with a grain of salt since he sells
bullion, but keep in mind that not only does what he see every day ring true
with others Ive spoken to, what hes convinced is ahead might just compel
you to count how many ounces you own...
Jeff Clark: Andy, tell us about your industry contacts and how you
get the information youre privy to.
Andy Schectman: We source our product from three of the largest six
primary U.S. mint distributors. Having 20 years of experience with these
sources, as well as the dealers in the secondary market, were as tied into the
industry as anyone.
Jeff: You made some interesting comments to me about supply
and premiums. Tell us what youre hearing and seeing in the
bullion market right now.
Andy: I feel as though Im the boy who cries wolf or that Ive been beating
the same drum for too long. But in reality, it has been my feeling since late
2007 that ultimately this market will be defined less by the price going
parabolic which I think ultimately will happen and more by a lack of
supply. You see occasional reports that state its just a lack of refined silver
or lack of silver in investable form. But as far as Im concerned, there is a
major supply deficit issue, and its getting worse.
Take the U.S. Mint, for example. Right now, as we talk, you can barely
get silver Eagles. Were seeing delivery delays of three to four weeks, and
premium hikes of a dollar or more in the last three weeks. Most of the
suppliers in the country are reluctant to take large orders on silver Eagles
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because they dont know (a) when theyll get them, and (b) what the
premiums will be when they arrive.
I was talking to the head of Prudential Bache and asked him about silver
Eagles. He said, You know, as soon as the allocations come in, theyresold out. We cant keep them in. This is coming from one of the largest
distributors of U.S. Mint products in the country.
And this is all occurring in an environment that has only minimal
participation by the masses. Few people in this country have ever even held
a gold or silver coin. So, if its this difficult to get bullion now, whats it going
to be like when it becomes evident to the masses they need to buy? This is
what keeps me up at night.
Jeff: What are you seeing in the secondary market? Are investors
selling bullion?
Andy: There is no secondary market. Absolutely none. Nobody is selling
back anything, at least not to us. Think about that: if this was a traditional
investment and your portfolio went up 100% in the last year, like silver has,
youd think some investors would take some profits and ride the rest out
but nobodys selling anything.
This is why I think the lack of supply is the single biggest issue in this
market. And in time, I think it will become much more obvious. [Ed. Note:
Were using the term secondary market in this instance to mean sellers of
bullion and not the scrap market.]
There are only five major mints U.S., Canada, South Africa, Austria and
Australia. Yes, there is a Chinese Mint and a couple Swiss Mints and someprivate refiners, but they amount to very little in the overall scheme of
things. Were in a situation where the mints are limiting the selection and
raising the premiums, and this is occurring at a time when most people own
no bullion. As it becomes more apparent that people want bullion instead of
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paper dollars, I think youll see premiums go parabolic and supply get even
tighter.
Jeff: Are you getting a lot of new buyers to the bullion market?
Andy: More than ever. One of the interesting things were seeing is a lot of
younger people dipping a toe in the water, buying little bits of silver here and
there. Were also seeing bigger orders, as well as more frequent phone calls
from financial advisers asking us if we can help their clients. So yes, the base
is broadening.
Jeff: Thats very interesting. So are you seeing more demand for
gold or silver right now?
Andy: 90% of the new business is in silver. And I think thats indicative of
the state of the economy. People are trying to get into precious metals, but
they think gold is too high. I think theyre buying silver because they realize
the fundamentals for owning gold also apply to silver. They think the profit
potential is better in silver, too. This has actually made the supply for gold
better than it is for silver right now, and a lot of that has to do with price.
Jeff: Hearing about all this new buying might make some thinkwere near a top in the market. Could that be the case?
Andy: No, no [chuckles]. I think Richard Russell says it best: Bull markets
die of exhaustion and overparticipation. Well, were nowhere near that
point when so few people in this country own gold and silver. Heck, Im a
bullion dealer, and most of my peers dont own any gold and silver! Yes,
youre seeing more commercials, but there are just as many commercials to
buy gold as there are to sell it. I think thats an indication this market is notexhausted.
Remember that in the year 2000 everyone and his brother had some
NASDAQ shares. Thats an example of an exhausted or overparticipated
market. Were nowhere near that.
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Jeff: So the take-away message is what?
Andy: First, I think you said it best with your recommendation to
accumulate. Not only will it smooth out the volatility in price and
premiums you pay, it will also give you a bird in the hand. If Im right about
this market, and I really believe I am, it will be defined by lack of availability
of refined product. To combat that, just accumulate month in and month
out, and be thankful when youre able to get what you want.
Second, its about the number of ounces you own. You want to get as many
ounces as you can without being penny wise and pound foolish. Stick with
the most recognized products dont buy 1,000-ounce bars, for example,
because theyre illiquid. You want to maximize your liquidity, and you dothat by buying the most common forms of bullion one-ounce coins, bars,
and rounds; 10- and 100-ounce products; and junk silver.
Last, keep in mind that premium and commission are two different animals.
Commission is what the dealers make on top of the premium. Premium is
what the industry bears. So if the U.S. Mint is selling silver Eagles for $3
over spot to the distributors, thats before theyre marked up to the public.
So even though the premium is high, youre actually going to get mostof that back when you sell. [Ed Note: Its not uncommon for the buyer to
recapture most of the premium when they sell, particularly during periods of
high demand.]
So, buy gold and silver while its available, even if you dont buy it from me,
because if Im right, getting it at all could soon be your biggest challenge.
Jeff: Thanks for your insights, Andy.
Andy: Youre welcome.
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Bullion Chest
We think owning no silver in this bull market would be a mistake. And while
ETFs and funds are good investments, your first (and biggest) investment insilver should be in a physical form.
How much physical silver should you have? Theres no right answer, and
one size will not fit all. But we do recommend holding more gold than silver,
roughly 80/20 or perhaps 70/30.
There are a growing number of options for owning silver bullion, and we
cover them below. Our advice is to find what best suits your needs and, as
always, diversify.
One-ounce silver Eagles, Maple Leafs and Philharmonics These
are our first choice for owning physical silver. All our recommended dealers
carry these coins, but check for availability. (Note that the U.S. Mint does
not produce a silver Buffalo if you see one, its a round and not a U.S.
mint product and South Africa does not make a silver Krugerrand.)
Silver Bars Available in 1, 10, 100, and 1,000 ounces. The larger the bar,
the smaller the commission per ounce. In one-ounce products, bars have
a lower premium than coins since theyre less expensive to manufacture,
though some investors prefer the beauty of a coin. We agree with Andy
about 1,000-ounce bars and would only buy if you keep them in a reputable
storage facility. This will avoid the need to have your bar assayed prior to a
sale to confirm to the buyer its weight and purity.
Silver Rounds Silver rounds lack the cachet of an official coin, primarily
because theyre not from a government mint and lack legal tender status.
However, the face value of a coin is mostly symbolic, and if you just want
metal, theyre just as good. This can be an easily affordable coin-like method
of owning silver. And rounds are .9999 silver, while the Eagle is .9993. Look
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for dealers that have a guaranteed buy-back program; this gives you a layer
of protection if/when you decide to sell.
Theres a company offering silver rounds at just $1.50/ounce over the spot
price (minimum 50 coins). Thats about a third of the current premium for
Eagles and Maple Leafs. Shipping and insurance are free, and they have
a guaranteed buyback program for their products. All of the details are
available to BIG GOLD subscribers, in the April 2011 issue.
Junk Silver Junk silver refers to circulated, pre-1965 U.S. coins that
contain 90% silver, and are bought in worn, nicked, and scratched condition.
Junk silver usually comes in bags of $1,000 face value in any combination
of dimes, quarters, and half-dollars. A $1,000 face value bag of junk silverweighs about 65 pounds, and at $35 silver would run $26,526.
Junk silver is one of the cheapest ways to buy silver, currently about the
same premium as bars. The disadvantage is that its bulky to store and
expensive to ship. If you go this route, make sure you use the coins (if you
ever do) based on their silver content and not their face value. Some dealers
will sell a $100 face value bag.
Pool Silver Looking for a way around high premiums? Buy into a pool
account now and take physical delivery when premiums drop (below 10%
for silver coins). A pool account is simply where you agree to pool your
holdings with those of others. You have no claim on a specific piece of metal,
but you have a claim on the metal the company controls, similar to having
money on deposit in a savings account at a bank.
The advantage is that you pay no storage fee and have plenty of liquidity
if/when you sell back to the pool company. If you someday sell your poolholdings, youd end up paying no storage or fabrication fees, regardless of
how long you held them.
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Kitco has a good program, though they require a $25 transaction fee for pool
orders below $2,500. Check the unallocated storage programs at both the
Perth Mint and EverBank as well.
Rare or Numismatic Silver Coins We dont recommend entering the
numismatic world unless you are, or are willing to become, a knowledgeable
coin collector. That said, we devoted an entire issue of BIG GOLD to
numismatics, which will be available to you if you choose to subscribe.
Commemoratives or Medallions We dont buy these because the
premium is higher and almost never recouped when they are sold. This
includes proof sets. Unless the premium is at or below a comparable
bullion coin, wed pass. A current exception: the premium on the silverCanadian Olympic coin is lower than the Maple Leaf at most dealers, so this
is something wed buy.
Silver Certificates A precious metal certificate is basically a claim
you have on metal held by a third party, and is thus only as good as the
underlying storage facility. Tops in our book is the Perth Mint Certificate.
Stored in Australia, you can denominate your certificate in any combination
of gold, silver, or platinum. A PMC is especially attractive for the large silverholder, and you instantly internationalize your assets. We covered PMCs in
an earlier article in BIG GOLD, in May 2009 available to all subscribers.
Also, check out EverBanks Metals Select Account. They have lower
minimums than the Perth Mint, and their fees for allocated storage are
smaller, too.
Silver in an IRA You can put physical silver (and gold) in your IRA or
ISP. Weve written on the topic before, and though our article discusses gold,the same issues apply to silver. BIG GOLD subscribers can see How Do I Put
Gold In My IRA? in the January 2009 issue of BIG GOLD.
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Choosing a Bullion DealerTrust is key when buying bullion. You want to get what you ordered and
deal with a company that stands behind its product. And you dont want to
be hounded with follow-up calls hyping special offers. Establishing a solid
relationship with a dealer is especially important in an environment of short
supply and rising premiums.
Weve put together a list of dealers that weve worked with over the years
people whom we like and trust and who have always met our expectations.
As a subscriber, youll find them listed in theApril 2011 edition of BIG
GOLD.
Id like to invite you to try an absolutely risk-free subscription to BIG GOLD.
Every month youll find the same kind of easy-to-read, in-depth information
youve read in this report. And youll find recommendations on the very
best gold and silver stocks, ETFs, mutual funds, and all the ways you can
own physical silver and gold always balancing the least risk with the best
possible returns.
Youll have complete access to the BIG GOLD
portfolio (currently 23 companies, funds, and
ETFs), all back issues of BIG GOLD, and the vast
library of articles and research for which Casey
Research is known.
A full year of BIG GOLD costs just $79. Try it for
3 months, and if its not what you had in mind,
cancel for a 100% refund.
YES, start my no-risk trial subscripon now!
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